market failure and socially undesirable outcomes II Flashcards
What is a positive production externality and how can it be seen on a graph?
external benefits created by producers such as firms engaging in medical research
- underallocation of resources for the production of a good
- 2 supply curves
MPC > MSC
How can these be corrected and what does it involve?
involves shifting the MPC (supply curve) to MSC to achieve allocative efficiency so that there is increased quantity for a lower price
- involves direct government provision and subsidies
how can positive production externalities be corrected?
- direct provision of goods and services by the government
- subsidies
how can positive consumption externalities be corrected?
- government legislation and regulation
- education and awareness creation
- nudges
- direct government provision
- subsidies
What is direct government provision and how can it be used to correct positive production externalities?
governments pay directly for the provision of goods or provide training
- as government supplies goods, supply curve shifts downwards to the right to MSC to a new market equilibrium with lower price and higher quantity
What are subsidies and how can it be used to correct positive production externalities?
governments give money to support firms
- shifts MPC to match MSC if subsidy is equal to external benefit
What is a positive consumption externality and how can it be seen on a graph?
external benefits are created by consumption of a good such as the consumption of education benefiting society
- 2 demand curves
MSB>MPB
What is allocative efficiency?
where the market is at equilibrium and demand meets supply
- community surplus is maximized
What are demerit goods?
goods which are harmful to consumers but are over provided for by the market
What are merit goods?
goods that are held to be desirable for consumers but are under provided for by the market
What are reasons for underprovision of merit goods?
- good may have positive externalities
- low levels of income and poverty
- consumer ignorance
What are the advantages and disadvantages of nudges?
nudges discourage consumption of demerit goods and encourage consumption of merit goods
- not forced and light pushes
- not guaranteed and can have different impacts on cultural groups
How can direct government provision be used to correct a positive consumption externality?
provides health care services and shifts the supply curve rightward to lower price and increase levels of output
How can regulation be used to correct a positive consumption externality?
promotes greater consumption of goods and shifts the demand curve to the right until optimum quantity is reached
What does correcting a positive consumption externality involve?
increasing demand by shifting the demand curve to the right (MPB to MSB) and shifting the supply curve downward so that price increases when demand increases and falls when supply increases
How can subsidies be used to correct a positive consumption externality?
gives money to firms providing goods with negative externalities and shifts the supply curve to the right to a lower price and higher quantity
How can nudges be used to correct positive consumption externalities?
discourages consumption of demerit goods and encourages consumption of merit goods
What are pros and cons of direct government provision and subsidies to correct positive externalities?
pros - effective in increasing quantity of merit goods, lower price for consumers
cons - rely on tax revenue, opportunity cost, hard to measure size needed, political problems
What are pros and cons of legislation, education and awareness creation to correct positive externalities?
pros - shift MPB to socially optimum
cons - limited effectiveness, higher prices may deter consumers, better used with other policies such as subsidies
